Gold Is The Best Hedge Against Looming Inflation

You've heard the argument against owning gold a thousand times. It goes something like this: "Gold has little to no utility and doesn't earn any interest, so why own it?" The answer is that you really have no choice but to own it when the government and central bank are destroying the value of your currency.

When interest rates are negative, investors are forced to buy gold. If the interest rate garnered by placing money in a bank or owning government debt is less than the rate of inflation, you must purchase an asset that will maintain its purchasing power. Gold has a 5,000-year history of preserving its value, and that is especially important during times of inflation.

Inflation is never an accident. It is deliberately inflicted upon a nation. The combination of massive government debt and central bank monetization has always produced inflation in the long term. The U.S. Federal Reserve has expanded its balance sheet to a record $2.2 trillion, and America's debt is also at a record high in excess of $12.5 trillion.

Currently one-year Treasury notes yield 0.39%. The Consumer Price Index, by contrast, is rising at an annual rate of 2.1%. Adding the inflation and interest rate data together indicates that investors in sovereign U.S. debt will suffer a 1.71% negative yield--and that's before taxes!

To make matters worse, the U.S. national debt, combined with the actions of the Fed, is likely to ensure the rate of inflation will increase over time. Gold's inflation-hedging qualities were essential during the last two inflation cycles. The price of gold increased from $35 an ounce in 1971 to $850 an ounce in 1980. At the beginning of this last inflation cycle, circa 2001, gold traded at $265 per ounce. It topped $1,200 in November 2009 before settling back to around $1,100 per ounce today.

Unless the Fed can successfully unwind its balance sheet without destroying the economy, and until the government dramatically reduces its debt, gold will be an essential part of an investor's portfolio. Gold is rare, virtually indestructible and quite beautiful. No government can increase its supply by fiat. And that is precisely where it derives most of its beauty.